Weekly Trends Dec 5

Weekly Trends
Ryan Lewenza, CFA, CMT, Private Client Strategist
OPEC Declares War on US Producers
The decline in oil prices and energy shares has been shockingly quick and deep,
with West Texas Intermediate (WTI) declining 37% in just six months. The key
problem in the oil markets is the current oversupply, stemming from a
dramatic increase in US oil production.
December 5, 2014
Equity Market YTD Returns (%)

S&P/TSX Comp
S&P/TSX Small Cap
For now, we are maintaining our overweight recommendation for the energy
sector. However, the sector is currently on downgrade watch and we may look
to downgrade the sector on short-term strength, which we believe may be
coming. In the near-term, we see the potential for the energy sector to bounce
in the coming months (see Chart of the Week).
This will be our last Weekly Trends publication until the New Year
when we will publish our 2015 market outlook in early January.
-5.9
S&P 500
11.8
Russell 2000
In response to US production increases, OPEC has made a major policy change

with respect to oil prices. Historically, OPEC has cut production in response to
excess supply and weak oil prices. With OPEC deciding not to cut production in
the face of a market clearly oversupplied, it signals to us, that OPEC is more
concerned about its declining market share than supporting prices.
As a result of this new strategy from OPEC, we believe WTI oil prices are set to
trade in a new lower range of roughly US$60/bbl to US$80/bbl in the coming
months. Given this view, our outlook for oil prices and the energy sector is less
constructive than just a few months ago.
7.3
0.4
MSCI World
4.1
MSCI Europe
5.1
MSCI EAFE
-4.2
MSCI EM
-1.8
-10
Canadian Sector
10
Curr. Wt
Recommendation
6.4
Market weight
Consumer Staples
3.5
Market weight
Energy
21.6
Overweight
Financials
36.5
Overweight
Health Care
3.6
Underweight
Industrials
8.6
Overweight
Information Technology
2.1
Overweight
Materials
10.6
Market weight
Telecom
4.9
Underweight
Utilities
2.2
Underweight
Level
Reading
S&P/TSX Composite
14,620.1
50-DMA
14,689.8
Downtrend
200-DMA
14,808.8
Downtrend
42.3
Neutral
RSI (14-day)
Historically When The S&P/TSX Energy Sector Has Become This Oversold
It Has Rallied Sharply In Subsequent Three Months Periods
Period
24-Feb-00
3-Oct-06
21-Jan-08
20-Nov-08
3-Oct-11
25-Jun-12
3-Dec-14
Average
Pct Below
200-DMA
-11%
-14%
-12%
-47%
-23%
-12%
-16%
-19%
Subsequent S&P/TSX Energy Returns

1 Month
2 Months
3 Months
6.7%
22.3%
43.0%
8.4%
15.1%
9.7%
11.7%
9.4%
27.9%
16.5%
21.2%
10.0%
19.9%
16.4%
16.2%
8.6%
13.8%
15.1%
?
?
?
10.3%
14.0%
17.4%
Source: Bloomberg, Raymond James Ltd.
Please read domestic and foreign disclosure/risk information beginning on page 5

Raymond James Ltd. 5300-40 King St W. | Toronto ON Canada M5H 3Y2.
2200-925 West Georgia Street | Vancouver BC Canada V6C 3L2.
15
Consumer Discretionary
Technical Considerations
Chart of the Week
-5
16,000
15,500
15,000
S&P/TSX
50-DMA
200-DMA
14,500
14,000
13,500
13,000
12,500
12,000
11,500
11,000
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Weekly Trends
December 5, 2014 | Page 2 of 4
OPECs About Face

The decline in oil prices and energy shares has been shockingly quick and deep, with
WTI declining 37% in just six months. Oil prices have suffered from a deluge of
negative headlines in recent months including: 1) slowing global economic growth,
led by weakness in Japan, China and Europe; 2) a strong US dollar (DXY), which is up
10% year-to-date (YTD); 3) a bearish report from the International Energy Agency
(IEA) which signaled the potential for further downside price pressures as a result
of excess supply; and 4) OPECs decision not to cut oil production last week. In this
weeks report we provide an update on the outlook for oil prices and the energy
sector following OPECs game changer decision not to cut production.
The key problem in the oil markets is the current oversupply, stemming from a
dramatic increase in US oil production. The US economy has experienced an
unprecedented energy renaissance in just a few years with US oil production more
than doubling from 4 mln b/d in mid-2008 to 9 mln b/d today. This increase of
roughly 5 mln barrels equates to about 4% of global production. While that may not
seem like a lot, the US shale revolution has single-handedly altered the global oil
supply/demand dynamics, with it having significant ramifications on prices.
In response to US production increases, OPEC has made a major policy change with
respect to oil prices. Historically, OPEC has cut production in response to excess
supply and weak oil prices (e.g., 1998, 2001 and 2008), in efforts to help stabilize
prices. This explains why we were in the camp that believed OPEC would cut
production at their last meeting (note: our energy analysts correctly called for OPEC
not to cut at the meeting). With OPEC deciding not to cut production in the face of a
market clearly oversupplied, it signals to us, that OPEC is more concerned about its
declining market share than supporting prices. Essentially, OPEC is willing to sacrifice
short-term pain for long-term gain, by sending a clear message to US producers that
they are in a battle for market share. This is accurately captured in the most recent
Economist magazine which depicts a Saudi Sheikh going back-to-back against a US oil
worker (sidebar).
Source: The Economist
As a result of this new strategy from OPEC, we believe WTI oil prices are set to trade
in a new lower range of roughly US$60/bbl to US$80/bbl in the coming months.
Technically, WTI oil prices broke below the important US$80/bbl support level, which
will now act as resistance. For oil to move materially higher and break back above
the US$80/bbl level, we would need to see either OPEC or the US cut back on
production. With oil likely to trade in a new lower range, our outlook for the energy
sector is less constructive than just a few months ago.
A Volatile Year For the Canadian Energy Sector
WTI Oil Breaks Long-term Support of US$80/bl

$120
3,700
3,500
$110
+25%
-25%
3,300
$100
3,100
$90
2,900
$80
$70
2,700
WTI Oil Price (US$/bbl)
S&P/TSX Energy Index

2,500
Dec-13
Support
Feb-14
Apr-14
Jun-14
Aug-14
Oct-14
$60
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Weekly Trends
Potential for a Trading Bounce

While our longer term outlook for the sector has become more cautious, we are
maintaining our overweight recommendation for the energy sector. However, the
sector is currently on downgrade watch and we may look to downgrade the sector
on short-term strength. In the near-term, we believe the energy sector could be
setting up for a bounce in the coming months given the following factors:
Valuations have become very compelling in certain areas of the energy

sector. In particular, we see good value in the integrateds, which remains
our preferred sector. Currently, the average P/CF ratio for Suncor Inc.,
Husky Energy Inc., and Imperial Oil Ltd. is 6.4x, which is a 30% discount to
the long-term average and near typical trough valuation levels. While cash
flows will clearly come under pressure with lower oil prices, current stock
prices have already discounted some of this.
Currently were in the heart of tax loss selling, which is likely contributing to
the aggressive declines. We saw this pattern play-out with the gold miners
in 2013, with the S&P/TSX Gold Index declining materially in October and
November before bottoming on December 6, 2013. Gold stocks then went
on to post a 25% rally in the first few months of 2014. We believe this
pattern repeat for energy stocks in early 2015.
Finally, we believe the energy sector is very oversold, which could result in
an oversold bounce over the next few months. We analyzed previous
periods when the S&P/TSX Energy Index was this oversold, looking at the
percentage that the Index was below its 200-day moving average (MA). We
found that in the six cases when the energy sector was this oversold, that it
posted average returns of 10.3%, 14%, and 17.4% in the subsequent one,
two and three months, respectively, with no periods of subsequent negative
returns. We find these historical results very compelling for an oversold
bounce in the early part of 2015.
Gold Miners Rallied 25% Following

Their Bottom in December 2013
2800
2600
2400
2200
-48%
2000
+25%
1800
1600
1400
1200
1000
Dec-12
S&P/TSX Gold Index

Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
OPECs decision not to cut was a game changer in our view. As such, the outlook for
the energy sector looks challenged over the next year. However, we believe the
energy sector could be setting up a tradable rally over the next few months.
Canadian Integrateds Are Inexpensive at 6x P/CF
20
Energy Sector Typically Rallies When This Oversold
P/CF (Average of SU, HSE, IMO)
18
Average
16
14
12
10
8
6
4
2
0
'01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
Period
24-Feb-00
3-Oct-06
21-Jan-08
20-Nov-08
3-Oct-11
25-Jun-12
3-Dec-14
Average
Pct Below
200-DMA
-11%
-14%
-12%
-47%
-23%
-12%
-16%
-19%
Subsequent S&P/TSX Energy Returns

1 Month
2 Months
3 Months
6.7%
22.3%
43.0%
8.4%
15.1%
9.7%
11.7%
9.4%
27.9%
16.5%
21.2%
10.0%
19.9%
16.4%
16.2%
8.6%
13.8%
15.1%
?
?
?
10.3%
14.0%
17.4%
Weekly Trends
Important Investor Disclosures

Complete disclosures for companies covered by Raymond James can be viewed at: www.raymondjames.ca/researchdisclosures.
This newsletter is prepared by the Private Client Services team (PCS) of Raymond James Ltd. (RJL) for distribution to RJLs retail clients. It is not a
product of the Research Department of RJL.
All opinions and recommendations reflect the judgement of the author at this date and are subject to change. The authors recommendations may
be based on technical analysis and may or may not take into account information contained in fundamental research reports published by RJL or its
affiliates. Information is from sources believed to be reliable but accuracy cannot be guaranteed. It is for informational purposes only. It is not
meant to provide legal or tax advice; as each situation is different, individuals should seek advice based on their circumstances. Nor is it an offer to
sell or the solicitation of an offer to buy any securities. It is intended for distribution only in those jurisdictions where RJL is registered. RJL, its
officers, directors, agents, employees and families may from time to time hold long or short positions in the securities mentioned herein and may
engage in transactions contrary to the conclusions in this newsletter. RJL may perform investment banking or other services for, or solicit
investment banking business from, any company mentioned in this newsletter. Securities offered through Raymond James Ltd., Member-Canadian
Investor Protection Fund. Financial planning and insurance offered through Raymond James Financial Planning Ltd., not a Member-Canadian
Investor Protection Fund.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual funds. Please read the prospectus before
investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The results presented
should not and cannot be viewed as an indicator of future performance. Individual results will vary and transaction costs relating to investing in
these stocks will affect overall performance.
Information regarding High, Medium, and Low risk securities is available from your Financial Advisor.
A member of the PCS team responsible for preparation of this newsletter or a member of his/her household has a long position in the securities of
BRP Inc. (DOO-T).
RJL is a member of Canadian Investor Protection Fund. 2014 Raymond James Ltd.

Weekly Trends Dec 5

Uploaded by

Copyright:

Available Formats

Weekly Trends Dec 5

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Weekly Trends Dec 5

Uploaded by

Copyright:

Available Formats

Weekly Trends

Ryan Lewenza, CFA, CMT, Private Client Strategist

OPEC Declares War on US Producers

Equity Market YTD Returns (%)

S&P/TSX Small Cap

In response to US production increases, OPEC has made a major policy change

Subsequent S&P/TSX Energy Returns

Source: Bloomberg, Raymond James Ltd.

Please read domestic and foreign disclosure/risk information beginning on page 5

Chart of the Week

Source: Bloomberg, Raymond James Ltd.

December 5, 2014 | Page 2 of 4

OPECs About Face

Source: The Economist

WTI Oil Breaks Long-term Support of US$80/bl

WTI Oil Price (US$/bbl)

S&P/TSX Energy Index

Source: Bloomberg, Raymond James Ltd.

December 5, 2014 | Page 3 of 4

Potential for a Trading Bounce

Valuations have become very compelling in certain areas of the energy

Gold Miners Rallied 25% Following

S&P/TSX Gold Index

Energy Sector Typically Rallies When This Oversold

P/CF (Average of SU, HSE, IMO)

Source: Bloomberg, Raymond James Ltd.

Subsequent S&P/TSX Energy Returns

December 5, 2014 | Page 4 of 4

Important Investor Disclosures

You might also like